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Cambridge University Press 978-0-521-57135-7 - A. W. H. Phillips: Collected Works in Contemporary Perspective Edited by Robert Leeson Frontmatter More information

ROBERT LEESON is Associate Professor at Murdoch University, Australia and was previously Bradley Fellow at the University of Western Ontario.

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A.W.H. Phillips

A. W. H. Phillips: Collected Works in Contemporary Perspective

Edited by Robert Leeson

CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Dubai, Tokyo, Mexico City

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First published 2000

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ISBN 978-0-521-57135-7 Hardback

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Contents

List of contributors page x Foreword by Arthur Brown xii Preface by Robert Leeson xvi

Part I Bill Phillips: Some Memories and Re¯ections 1 A.W.H. Phillips: An extraordinary life 3 Robert Leeson 2 The versatile genius 18 James Meade 3 To be his colleague was to be his friend 20 Henry Phelps Brown 4 Phillips' adaptive expectations formula 22 Phillip Cagan 5 Economist ± washing machine ®xer 23 Elizabeth Johnson 6 Playing around with some data 24 Ann S. Schwier 7 The Festschrift Brian Silverstone 26

Part II The Phillips Machine 8 The origins of the machine in a personal context 31 Walter Newlyn 9 The Phillips Machine as a `progressive' model 39 David Vines

vi Contents

10 Mechanical models in economic dynamics 68 A.W. Phillips 11 The history of the Phillips Machine 89 Nicholas Barr 12 Early reactions to Mark I and II 115 Graeme Dorrance 13 A superb explanatory device 118 R.M. Goodwin 14 The Phillips Machine and the history of computing 120 Doron Swade

Part III Dynamic Stabilisation Optimal Control 15 The optimal control articles 130 Adrian Pagan 16 Stabilisation policy in a closed economy 134 A.W. Phillips 17 Stabilisation policy and the time-forms of lagged responses 169 A.W. Phillips 18 Arnold Tustin's The Mechanism of Economic Systems: a review 184 A.W. Phillips 19 Michel Kalecki's Theory of Economic Dynamics: An Essay on Cyclical and Long-Run Changes in the Capitalist Economy: a review 186 A.W. Phillips

Growth 20 The growth articles 190 A.R. Bergstrom 21 A simple model of employment, money and prices in a growing economy 195 A.W. Phillips

Contents vii

22 Employment, in¯ation and growth 207 A.W. Phillips 23 Economic policy and development 224 A.W. Phillips

The Empirical Phillips Curve 24 The famous Phillips Curve article 232 Richard G. Lipsey 25 The relation between unemployment and the rate of change of money wage rates in the United Kingdom, 1861±1957 243 A.W. Phillips 26 Discussion of Dicks-Mireaux and Dow's The Determinants of Wage In¯ation: United Kingdom, 1946±1956 261 A.W. Phillips 27 The Melbourne paper 263 John Pitchford 28 Wage changes and unemployment in Australia, 1947±1958 269 A.W. Phillips 29 Phillips and stabilisation policy as a threat to stability 282 William J. Baumol 30 The Phillips Curve in macroeconomics and econometrics 288 L.R. Klein 31 Bill Phillips' contribution to dynamic stabilisation policy 296 Stephen J. Turnovsky 32 A Left Keynesian view of the Phillips Curve trade-off 304 G.C. Harcourt 33 Interactions with a fellow research engineer±economist 308 Charles C. Holt 34 Does modern econometrics replicate the Phillips Curve? 315 Fatemeh Shadman-Mehta 35 The famous Phillips Curve article: a note on its publication 335 Basil S. Yamey

viii Contents

Part IV Econometrics

The Published Papers 36 The Bill Phillips legacy of continuous time modelling and econometric model design 342 Peter C.B. Phillips 37 The published papers 348 Peter C.B. Phillips 38 The in¯uence of A.W. Phillips on econometrics 353 David F. Hendry and Grayham E. Mizon 39 An appreciation of A.W. Phillips 365 Lars P. Hansen and Thomas J. Sargent 40 Some notes on the estimation of time-forms of reactions in interdependent dynamic systems 370 A.W. Phillips 41 Cybernetics and the regulation of economic systems 385 A.W. Phillips 42 The estimation of parameters in systems of stochastic differential equations 395 A.W. Phillips 43 Estimation, regulation and prediction in interdependent dynamic systems 408 A.W. Phillips and M.H. Quenouille

The Walras-Bowley Paper 44 The Walras±Bowley paper 420 Adrian Pagan 45 Estimation of systems of difference equations with moving average disturbances 423 A.W. Phillips

The Unpublished Papers 46 The estimation of continuous time models 446 A.R. Bergstrom

Contents ix

47 Estimation in continuous time series models with autocorrelated disturbances 449 A.W. Phillips 48 Ef®cient ®tting of rational spectral density functions and transfer functions 451 A.W. Phillips

Phillips' Foreshadowing of the Lucas Critique 49 The Lucas Critique: did Phillips make a comparable contribution? 460 Robin Court 50 Models for the control of economic ¯uctuations 468 A.W. Phillips 51 Statistical estimation for the purpose of economic regulation 475 A.W. Phillips 52 The last paper: a foreshadowing of the Lucas Critique? 479 A.W. Phillips References 487 Index of names 507 Index of subjects 511

Contributors

ARTHUR BROWN, Emeritus Professor of Economics, University of Leeds NICHOLAS BARR, Senior Lecturer in Economics, London School of Economics WILLIAM J. BAUMOL, Professor of Economics and Director, C.V. Starr Center for Applied Economics, New York University Senior Research Economist and Emeritus Professor of Economics, Princeton University A.R. BERGSTROM, Emeritus Professor of Economics, University of Essex HENRY PHELPS BROWN, Emeritus Professor of Economics, London School of Economics PHILLIP CAGAN, Professor of Economics, Columbia University ROBIN COURT, Professor of Economics, University of Auckland GRAEME DORRANCE, Visiting Fellow, University of New South Wales R.M. GOODWIN, Emeritus Reader, University of Cambridge Emeritus Fellow, Peterhouse, University of Cambridge Professor Emeritus, University of Sienna LARS P. HANSEN, Professor of Economics, University of Chicago G.C. HARCOURT, Emeritus Reader in the History of Economic Theory, University of Cambridge Emeritus Fellow, Jesus College, University of Cambridge Professor Emeritus of Economics, University of Adelaide DAVID F. HENDRY, Leverhulme Personal Research Professor of Economics, University of Oxford Fellow, Nuf®eld College, University of Oxford CHARLES C. HOLT, Emeritus Professor of Management, Graduate School of Business, University of Texas at Austin ELIZABETH JOHNSON, Co-Editor, The Collected Writings of John Maynard Keynes

Contributors xi

L.R. KLEIN, Emeritus Benjamin Franklin Professor of Economics, University of Pennsylvania Recipient of the Nobel Memorial Prize for Economic Science ROBERT LEESON, Senior Lecturer in Economics, Murdoch University RICHARD G. LIPSEY, Emeritus Professor of Economics, Simon Fraser University Fellow, Canadian Institute for Advanced Research JAMES MEADE, Emeritus Professor of Economics, University of Cambridge Honorary Fellow, University of Cambridge Recipient of the Nobel Memorial Prize for Economic Science E. MIZON, Leverhulme Professor of Econometrics, Southampton University Professor of Economics, European University Institute, Florence WALTER NEWLYN, Professor of Economics (retired), University of Leeds ADRIAN PAGAN, Professor of Economics, Australian National University PETER C.B. PHILLIPS, Sterling Professor of Economics Cowles Foundation for Research in Economics Yale University JOHN PITCHFORD, Emeritus Professor of Economics, Australian National University M.H. QUENOUILLE, Professor of Statistics, London School of Economics THOMAS J. SARGENT, Senior Fellow, Hoover Institution ANN S. SCHWIER, Emerita Professor of Economics Southern Illinois University at Edwardsville FATEMEH SHADMAN-MEHTA, Research Of®cer, IRES, UniversiteÂ Catholique de Louvain BRIAN SILVERSTONE, Senior Lecturer in Economics, University of Waikato DORON SWADE, Assistant Director and Head of Collections, Science Museum, London STEPHEN J. TURNOVSKY, Castor Professor of Economics, University of Washington DAVID VINES, Fellow and Tutor in Economics, Balliol College, University of Oxford Adjunct Professor of Economics, Australian National University Research Fellow, Centre for Economic Policy Research, London BASIL S. YAMEY, Emeritus Professor of Economics, London School of Economics

Foreword Arthur Brown

Almost two generations of economists across the world have been famil- iar with the name Phillips from its attachment to the curve depicting a relation between the unemployment rate and wage in¯ation. A generation of economists in half a dozen universities also learned to associate that name with an hydraulic model that demonstrated with brilliant clarity the consequences of the interrelations set out in Keynesian economics. A smaller number of readers would probably be aware of a variety of articles on macroeconomic and econometric subjects under the same name. In this book, mainly through the efforts of Robert Leeson, all the published (and some hitherto unpublished) writings of Alban William Housego Phillips are assembled, along with a selection of the discussions which they provoked at the time of their publication or, in a few cases, more recently. Any collection of a writer's works has something of the character of a memorial to him. The man to whom the present collection stands in this relation was a very remarkable person indeed, whose writings (and hydraulic model) by no means exhaust the reasons for which he should be remembered. Bill Phillips' career, not in the least an orthodox academic one, was a switchback of triumphs and disasters. Born in New Zealand in 1914, he left school without any immediate prospect of higher education and passed into a wandering life, in the course of which he quali®ed and worked as an engineer. In the war he proved himself a hero, both in action and as a prisoner of war of the Japanese. This fact has been brought to light by Robert Leeson ± Phillips was reticent on such matters. He survived, was decorated, and, like many other ex-servicemen, received a chance of university education which he had not had previously. But in his undergraduate years at the London School of Economics (LSE) he achieved only a poor degree ± partly perhaps because he had chosen a subject (Sociology) that did not really suit his abilities, more certainly because the strains of war had affected his ability to perform in written examinations.

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Foreword xiii

In the course of his studies, however, his curiosity about the working of a monetary economy had been stimulated. It is possible that the idea of clarifying this by means of an hydraulic model had been given to him by a diagram in Kenneth Boulding's textbook of economics, representing an imaginary model of this kind designed to elucidate equilibrium in the market for a commodity. However that may be, with the help and advice on Keynesian economics of his LSE contemporary and friend Walter Newlyn, he set to work to build a much more elaborate machine representing a whole economy, with foreign trade, a public sector and a central bank. The success of the model, when it was demonstrated at the LSE, was spectacular. It persuaded James Meade and others that, despite his other- wise lowly academic quali®cations, Phillips should be appointed to an assistant lectureship in the School. Once his foot was on the academic ladder, his rise was meteoric. He expounded the mathematics of the model (and variants on it) in an article published in Economica in August 1950 (chapter 10), and completed a doctoral thesis on `Dynamic Models in Economics', the gist of which appeared in the Economic Journal in 1954 (chapter 16). In the same year he was promoted to a Readership and four years later attracted worldwide attention with his `curve' (chapter 25). In 1958, too, he was appointed to the Tooke Chair. This was the peak of his fortunes as an economist. He continued to work mainly on problems of control and related problems of estimation. Then in 1967 he moved to the Australian National University (ANU) and turned his attention partly to Chinese studies ± he had learnt Chinese from fellow prisoners of war. In 1969 he suffered a disabling stroke, and returned home to New Zealand. Six years after that, at the age of sixty, he was dead. I cannot claim to have known Phillips as well as his LSE colleagues, for instance, did, but our acquaintance, which was connected with the hydraulic model and, more ¯eetingly, with the curve, made a deep impression on me. It began when, by arrangement with Walter Newlyn who had recently become a colleague of mine, I visited him in the Croydon garage where he and Newlyn were constructing the prototype model, which the University of Leeds subsequently acquired. I got to know him better as he, more than once, came to Leeds to service the model. The last such occasion was after his appointment to the Tooke Chair; he was not one to stand on his dignity! Before the publication of his famous 1958 article which launched the curve, knowing my earlier work on the same subject he invited me to discuss with him the results recorded therein. I think our discussion turned on the difference made by

xiv Foreword

our having used slightly different time lags in our respective plottings of largely similar data. As always, it was a pleasure to talk with him. It seems to have been the general experience of Bill Phillips ± it was certainly mine ± that to know him was to like him. He was friendly, practical, full of quiet enthusiasm for whatever ideas he was pursuing at the time, and without the slightest trace of self-importance or pomp- osity. He seemed to bring a breath of Antipodean fresh air with him. Primarily, he was a problem-solver. In keeping with his engineering background and talents, he wanted to know how systems worked, and how they could be made to work better. He had come relatively late to economics, and I do not think he was much interested in the scholarship of the subject ± who had said what, and when. Perhaps that is one reason why, when he felt that he had delved as far as he could into the vein of ideas about macroeconomic stability that he had found so productive, he began to turn his attention to a subject at least partly outside general economics. Other engineers have appeared upon the economic scene at various times and with various results. Dupuit and Fleeming Jenkin scored not- able successes because the applied mathematics of engineering could be brought to bear productively on important economic problems once those problems had been rightly understood. Major Douglas fared less happily because, while he perceived that demand de®ciency was connected with the circular ¯ow of money, he misperceived the nature of that ¯ow. Phillips listened to the economists, got the ¯ow of money right, could solve the differential equations describing its changes, and also had the enterprise and the very considerable manual skill needed to turn his perceptions into hardware that didn't leak ± or didn't leak too much. His curve was less clearly a product of his engineering background. It had its roots in a theoretical relation between the level of activity and price in¯ation postulated in his 1954 essay `Stabilisation Policy in a Closed Economy' (chapter 16). The success of its ®nal, empirical version owed much to its timeliness. In 1958 people had stopped worrying about a post-war depression (a second 1920±2, or even a second 1929±33) and had started worrying about a new sort of creeping in¯ation connected with high employment. Moreover, there was still a decade to go before expectations of continuing in¯ation became strong enough to blow the curve away very markedly to the north-east; it had time to establish itself as an apparently simple guide after its publication. One might say that Phillips' spectacular success in economics was owed partly, like most spectacular successes, to elements of good fortune. He had luck (as I have just said) in the time of producing his curve. He was lucky in being able to bring to macroeconomic problems some highly

Foreword xv

relevant ideas developed in control engineering over the preceding generation. He was lucky in coming to the sympathetic attention of James Meade, who had started his textbook twenty years before with an expo- sition of the circular ¯ow of money (including why Major Douglas had been wrong) to which the Phillips Machine provided a perfect concrete illustration. Meade had himself dealt in a famous article with the stability conditions of a Keynesian system, and was also no mean amateur pro- ducer of precision artefacts ± from kites to cabinets. But the element of good luck is not what one dwells on when thinking of the career of one who contended so valiantly with so much of the other sort of fortune. In Bill Phillips' case, the real good luck was with those of us who had the privilege of knowing him.

Preface

Virtually all of contemporary macroeconomics is underpinned by a Phillips Curve of one variety or another; yet most of this literature dis- plays a curious neglect of the theoretical dynamic stabilisation perspective provided by A.W.H. `Bill' Phillips. This volume of Phillips' complete published output integrates Phillips' empirical work with his theoretical contribution. In addition to these twelve chapters, twenty-nine of the world's leading authorities in their ®eld have contributed thirty-two chapters (thirty of which have been specially commissioned) to highlight and interpret Phillips' on-going in¯uence. This volume also contains six of Phillips' previously unpublished essays, plus a little-known book review. Four of these essays were thought to have been lost. A ®fth essay (Phillips' second empirical Phillips curve) was previously an obscure working paper of which few copies circulated. The sixth essay is a fore- runner of the Lucas Critique written by Phillips, in longhand, shortly before his death. It seems likely that nobody has ever seen this remarkable essay before. Regrettably, we have, so far, been unable to locate four of Phillips' unpublished papers. The Final Report of the London School of Economics Project on Dynamic Process Analysis (dated 1963) listed as `substantially completed' three essays by Phillips: `Minimum Identi®cation Conditions for the Derivation of Optimum Linear Decision Rules', `Ef®cient Estimation of Multivariate Difference Equations with Serially Correlated Disturbances' and `A General Method of Obtaining Optimal Linear Decision Rules for Multivariate Dynamic Systems'. Phillips presented a summary of these papers entitled `Some Developments in Time Series Analysis' at the December 1962 meeting of the Econometric Society. Any information about these essays will be gratefully received. In the late 1960s, Phillips worked on stabilisation theory with Alfred Maizels of the United Nations Conference on Trade and Development. But we decided not to reprint his UNCTAD

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Preface xvii

paper on `Analysis of the Operation of a Buffer Stock for Cocoa' because it did not readily ®t into the scheme of the volume. However, a copy of this paper will be supplied upon request. Numerous people have generously assisted with this project. Valda Phillips preserved her husband's private papers (including the papers that are published here for the ®rst time) for nearly two decades after his death in 1975. Susan Howson initially suggested these papers might still exist, and Robert Mundell suggested that Phillips' Collected Works should be available under a single cover. Brian Silverstone was extraor- dinarily generous in reading ± and improving ± every chapter and Nena Bierbaum provided excellent guidance as the volume editor. Rex Bergstrom, Jim Thomas and Robin Court assisted in the process of eliminating reproduction errors in Phillips' unpublished chapters. Between us we have attempted to produce an error-free volume. We have corrected some typographical errors in Phillips' original essays and we have provided some bibliographical information that Phillips' listed as `forthcoming'. Judy Klein, Adrian Pagan, David Giles, Malcolm Rutherford and Jim Thomas assisted in the process of tracking down information about these `forthcoming' essays. Since I was respon- sible for more of the word processing than I care to remember, any remaining errors (of which I hope there are none) are quite literally mine. In addition to the people already mentioned, I am grateful to the following for encouragement and information: Chris Archibald, Nick Barr, A.R. Bergstrom, Horst Bierbaum, Mark Blaug, Conrad Blyth, W.D. Borrie, A.J. Brown, Ray Byron, Warren Cooper, Robin Court, Nerissa David, Megnad Desai, Graeme Dorrance, Sir Edward Dunlop, Jim Durbin, Milton Friedman, Charles Goodhart, Richard Goodwin, Bob Gregory, Herb Grubel, Rene Grypma, Geoff Harcourt, Thelma Hunter, Carol Ibbotsen-Somervell, A. Ikonnokov, Raja Junankar, Peter Kenyon, Alex Kerr, Kurt Klappholz, Lawrence Klein, David Laidler, Richard Lipsey, James Meade, Max Neutze, Henry Phelps Brown, Anna Phillips, Peter Phillips, John Pitchford, Steven Resnick, Ruth Richardson, Paul Samuelson, J.D. Sargan, Graeme Snooks, Robert Solow, Max Steuer, Herb Thompson, Sir Laurens van der Post, David Vines and Basil Yamey. Of these, Chris Archibald, Sir Edward Dunlop, J.D. Sargan, Sir Laurens van der Post, James Meade, Richard Goodwin and Henry Phelps Brown died before the project was completed (the last three contributed chapters to this volume). The chapters by James Meade and Richard Goodwin are, I believe, their ®nal essays.

Robert Leeson